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Fuel not solely to blame for rising farm production costs

Agriculture.com Staff 07/14/2006 @ 2:05pm

Rising grain production costs are attributable to much more than what goes in the tractor's gas tank, said a University of Illinois Extension farm management specialist.

"Of the $50 increase in per acre costs between 2003 and 2005, less than half are directly attributable to rising energy prices," said Gary Schnitkey, who co-authored the study with Extension colleague Dale Lattz.

The complete report, "Cost Increases: Its Not Just Energy," can be read online at U of I Extension's farmdoc website here.

The report examines production costs for grain farms in the northern, central and southern sections of Illinois based on data provided by the Illinois Farm Business Farm Management (FBFM) Association.

"Per-acre costs are divided into 'energy-sensitive costs' and 'energy non-sensitive costs,'" Schnitkey explained. "Energy-sensitive costs are those whose prices are directly influenced by changes in energy prices. These include fertilizer, fuel and oil, drying, and utilities.

"The remaining costs are placed in the non-sensitive category."

For northern Illinois grain farms, per-acre financial costs have increased from $349 per acre in 2003 to $399 in 2005, an increase of $50 per acre.

"Since 1980, no other two-year period has had as large an increase in costs as between 2003 and 2005," he noted. "Of the $50 increase, energy-related items account for $22 per acre, or 44 percent, of the cost increase. Fertilizer is the leading cost increase category, with a $16 per acre increase between 2003 and 2005. Fuel and oil costs increased by $6 per acre during that time.

"Energy non-sensitive costs have increased by $28 per acre in that period. Costs in this category with large per acre increases include cash rent, seed, pesticides, and interest."

Schnitkey pointed out that northern Illinois is not unique.

"Central Illinois grain farms have cost increases of $42 per acre, with 47 percent of the increase coming from energy-sensitive items. Southern Illinois grain farms have costs increases of $69 per acre, with 34 percent coming from energy-sensitive items."

The report has a number of implications, he added.

"Energy-sensitive costs have the possibility of declining in the future if prices for oil and natural gas decrease," Schnitkey said. "At this time, energy price decreases seem unlikely. However, oil and natural gas are commodities, and commodity prices are notoriously sensitive to supply-and-demand changes.

"In the future, energy prices could decline with findings of new supplies or reductions in demand. Declines in energy prices are not unprecedented, as illustrated by energy prices during the 1970s through the 1990s."

Production costs that are not as energy sensitive such as cash rents, seeds, and pesticides have less chance of declining, he noted.

"The increases in the non-sensitive cost categories signal a general, permanent higher level of costs," he said. "This higher level of costs introduces heightened risks, as revenue declines could lead to lower levels of income than in previous years."

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